BUENOS AIRES, Jan 7 (Reuters) - Argentine financial markets recovered ground in midday trade on Thursday despite lingering concern over a dispute between the president and the central bank chief over using foreign reserves to pay debt.

The benchmark MerVal .MERV stocks index was up 0.57 percent at 2,376.03 points, rebounding from earlier losses a day after President Cristina Fernandez asked Central Bank President Martin Redrado to resign. For details, see [ID:N07183139]

Government bonds trading over the counter in Buenos Aires continued to lose ground for a second consecutive session, but pared losses to an average of 0.3 percent.

Bonds fell by 1.5 percent on average on Wednesday while stocks ended down 1.63 percent.

Among the biggest losers on the local debt market was dollar-denominated Boden 12 paper ARBODEN12D=RASL, sliding 1.8 percent.

Fernandez asked Redrado to step down on Wednesday after he blocked her order to use some $6.6 billion in foreign currency reserves to repay debt. He refused to step down, saying only Congress can remove him.

On the foreign exchange market, the peso was up 0.26 percent at 3.8625/3.6750 per U.S. dollar ARSB= in informal trade between foreign exchange houses, as measured by Reuters.

In formal interbank trade, the peso also firmed 0.26 percent at 3.7950/3.7975 per dollar ARS=RASL.